I am the founder and CEO of CircleUp, an accredited investor crowdfunding platform focused on consumer and retail companies. Before I started CircleUp, I worked in consumer-focused private equity at TSG Consumer Partners and Encore Consumer Capital. My experience in private equity exposed me to many great consumer and retail businesses that were too small to obtain funding through the traditional private equity channels. I created CircleUp to open up these investment opportunities to more investors, helping the best of these businesses gain access to capital while lowering the cost of investment for individual and small institutional investors. I received my MBA from Stanford and BA from Duke. I also hold Series 24, 63, and 82 licenses. You can connect with me through http://www.facebook.com/CircleUp.

Happy First Birthday JOBS Act

It’s hard to believe that it was almost one year ago (April 5,2012 to be precise) that President Obama signed the JOBS Act into law. At the time, Obama noted, “Because of this bill, start-ups and small business will now have access to a big, new pool of potential investors—namely, the American people. For the first time, ordinary Americans will be able to go online and invest in entrepreneurs that they believe in.” Equally hard to believe for me personally is that it’s been almost one year since we launched CircleUp, which has quickly grown into one of the largest equity-based consumer products crowdfunding websites in the US.

However, while the one year anniversary of the JOBS Act is upon us, the law’s key provisions, namely Title II (general solicitation) and Title III (equity crowdfunding for unaccredited investors) are still not written. As a quick refresher, the general solicitation provision will allow companies raising money to broadly advertise their raise to customers, consumers, suppliers, etc. Unaccredited equity-based crowdfunding will allow investors making less than $200,000 per year to invest a limited amount of money into private companies in exchange for equity.

With unemployment still well above 7%, we recognize the urgency of implementation of the JOBS Act; it will provide a much needed boon to the U.S. economy by giving early stage companies access to capital. We are also fervent believers that the financial services industry needs disruption. The primary technology still used in most private company capital raises is email and Microsoft Excel. Fundraising usually takes the lion’s share of an entrepreneur’s’ attention for 6-12 months at a time when her company needs her attention the most.

Imagine if all travel were still booked through travel agents and Expedia, Hotwire, Priceline, etc. did not exist. Imagine if you still needed to lug around the Yellow Pages to look up a phone number, or carry around a book of maps in your car to get directions. Financial services are stuck in the “Yellow Pages” age of technology.

While the SEC has been sharply criticized for moving slowly to implement Title II and III (implementation of equity crowdfunding was supposed to have been completed by 12/31/2012), we at CircleUp support the SEC taking a measured approach to implementing the most disruptive innovation that financial services has seen in decades. Rules need to be created to protect both companies and investors. Some crowdfunding portals contend that free market principles should rule the day, and the floodgates of crowdfunding should be thrown open with no restrictions. We strongly disagree with this approach, and you need to look no further than the 2008 financial crisis to see why financial markets need rules in place to govern actors and their incentives.

The key question then is what type of rules should the SEC be crafting? The first set of rules that should be created is one that protects small investors without harming the efficiency/risk-return tradeoff of crowdfunding. Rules to force transparency—such as mandating that crowdfunding portals have online forums and open dialogue among investors in their communities—and rules that require background checks on entrepreneurs raising capital as well as the financial/legal standing of their companies are a must. In addition to protecting investors, the SEC’s rules must protect the companies that are crowdfunding. Crowdfunding portals should be required to register with FINRA as broker-dealers, just as if a third-party was facilitating a fundraise in the offline world.

While the world awaits the proposed rules for Title III, the more important delay is in enacting the already proposed rules for Title II, general solicitation. Today, companies that are raising capital are not able to inform even their most passionate supporters. Instead, they must turn to private networks of known Angel investors. The result is not only an inefficient process – but an unfair system that enables entrenched networks of established investors to get all the best deal flow. This can, and should, change when Title II of the Jobs Act comes into effect.

Many critics, including Steven Rattner in the NY Times recently, have written about the potential unintended consequences of the lifting on the ban on advertising. Hedge funds and other pooled investment vehicles will be able to market themselves – potentially leading less sophisticated investors into investments that are not suitable for them. Moreover, it is hard to see the direct connection between a public market long/short fund raising more capital and new jobs for small businesses.

I propose a new solution – have a staged lifting on the ban for general solicitation. At first, allow only small businesses, those companies with less than $50M in revenue that are seeking growth capital directly from investors, to advertise. (This is self-serving for CircleUp and equity crowdfunding) This rulemaking would clearly follow Congressional intent – and goals for helping the 28M small businesses that are responsible for over 60M jobs most directly, while avoiding the less meritorious claims of pooled investment vehicles like hedge funds. The small business investment market is small relative to the broader pooled investment market, presenting less risk for regulators in making a dramatic change. As the market absorbs this change, required by the JOBS Act, regulators can then study the impact and make any necessary adjustments prior to the broader loosening of the restrictions for all Regulation D, 506 offerings. Lets not forget that private investments are illiquid and high-risk, whether done offline or through a crowdfunding platform. Because of that, platforms should be required to register with FINRA as broker dealers, or partner with one. In addition, platforms must provide the necessary information (i.e. background checks) and transparency (through forums, etc) investors need to make thoughtful decisions.

Equity crowdfunding is the most disruptive thing to happen to the financial services industry in a very long time. While the SEC has been slow to implement crowdfunding for unaccredited investors, we fully support the SEC taking a deliberate approach to rule crafting. Rules need to balance protections for companies and investors. At the same time, these rules should recognize and facilitate the enormous potential of the crowd to inject capital and knowledge into early stage companies across America.

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